Retail Sector Forecast Remains Cloudy

Consumer spending remains fragile and will impact the retail sector and gross domestic product (GDP). The key drivers are jobs and wealth generation from such sources as stocks and housing.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST), along with the increasingly popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Spending on big-ticket items continues to be fragile. Durable Goods Orders fell 4.2% in March, well below the drop of 1.7% expected and the 1.9% gain in February. Excluding transportation, the reading fell 1.1% compared to the 1.9% gain in February.

In March, retail sales excluding auto increased 0.8%, down from 0.9% growth in February, but above the 0.6% estimate.

Job creation is the most critical variable for the retail sector. The weekly initial claims have been below the threshold 400,000-level for weeks.

In March, a disappointing 120,000 jobs were created, well below the 200,000 estimate and the 240,000 in February. The jobless rate was 8.2%, which is an improvement, but it’s still too high for a healthy economy and could strangle growth in the retail sector.

The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until at least 2013.

A strong U.S. housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening as home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped at below the mortgage value.

The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending; thereby impacting the retail sector.

The reality is that foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 until prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.